By Herbert Lash
NEW YORK (Reuters) - U.S. stocks surged on Tuesday asinvestors overcame initial disappointment that the FederalReserve cut its benchmark interest rate less than expected andfocused on the likelihood of future cuts, driving the S&P 500to its biggest percentage gain in more than five years.
Oil prices surged 3 percent, while the dollar reversedearlier losses and strengthened against the euro. And U.S. goldfutures turned lower after the Fed slashed its target interestrate by three-quarters of a percentage point to 2.25 percent.
The S&P 500 had its best daily percentage gain sinceOctober 2002, rising more than 4 percent. The technology-richNasdaq also jumped more than 4 percent for its biggestpercentage gain since October 2003, while the Dow industrialsjumped more than 400 points.
Earlier, European benchmark indexes gained more than 3percent.
Investors had expected a cut of a full percentage point butanalysts said the Fed's recent actions showed it was preparedto do what it takes -- such as its intermediation in the saleof investment firm Bear Stearns on Sunday -- to get its handsaround a simmering global credit crisis.
Better-than-expected earnings from Wall Street banksGoldman Sachs and Lehman Brothers also provided relief to thebattered financial sector on both sides of the Atlantic.
"The Fed has shown that they are focused on getting theeconomy back on its feet first and foremost, and they willworry about inflation later," said K. Daniel Libby, seniorportfolio manager at Sands Brothers Select Access Fund inGreenwich, Connecticut.
U.S. stocks jumped to session highs after the Fed announcedits decision, and U.S. short maturity Treasury debt pricesextended losses.
Market expectations of a Fed rate cut had deepened afterJPMorgan Chase on Sunday agreed to purchase stricken rival BearStearns for the fire-sale price of $2 a share.
"The economy will likely recover later this year based onwhat the Fed is doing. The market is rallying today. It got sooversold that I won't be surprised to see it rally further,"said Chip Hanlon, president of Delta Global Advisors Inc inHuntington Beach, California.
"There's been tremendous panic. People throwing the babyout with the bath water, preparing for a Category 5 hurricane,and that presents a buying opportunity," Hanlon said.
The Dow Jones industrial average was up 420.41 points, or3.51 percent, at 12,392.66. The Standard & Poor's 500 Index wasup 54.14 points, or 4.24 percent, at 1,330.74. The NasdaqComposite Index was up 91.25 points, or 4.19 percent, at2,268.26.
FINANCIAL SHARES DRIVE GAINS
U.S. and European stocks had rallied in anticipation of arate cut aimed at easing a global credit crunch, and after theprofit reports from Goldman Sachs and Lehman Brothers toppedWall Street estimates.
Investors were reassured that U.S. financial companies areholding up despite market turmoil caused by the subprimemortgage crisis and a slowing U.S. economy.
Stocks may be trading off a floor and could be poised for asignificant rebound in coming months, which has made David Joy,market strategist at RiverSource Investments, a unit ofAmeriprise Financial Inc in Minneapolis, a selective buyer.
"We don't think the economy is quite as bad as peoplethink. We're discounting worse expectations than we're likelyto get," said Joy. "That's not to say we don't recognize therisks out there and the problems. But gosh, it looks to us likevalue is beginning to emerge in a number of places."
It was the best day for financial stocks since March 2000,while top U.S. home finance companies Fannie Mae and FreddieMae surged the most in 20 years. Fannie soared 27 percent to$28.22, and Freddie climbed 26 percent to $26.02. Homebuildersalso rose sharply.
Expectations that regulators will ease restrictions onFannie Mae and Freddie Mac and encourage them to boost spendingin the slumping U.S. housing market also eased investorjitters.
SAFE-HAVEN BID SAPPED
Rising stocks sapped the safe-haven bid for governmentdebt, and oil rose on expectations a Fed rate cut will furtherweaken the U.S. dollar and spur investor demand for crude.
U.S. benchmark 10-year Treasury notes traded a full pointlower and euro-zone government bond prices tumbled as WallStreet rallied and inflation worries in Europe took the edgeoff speculation about a near-term rate cut by the EuropeanCentral Bank.
Investors in Europe were less sure about a rate cut by theECB after a media report that the bank was unlikely to cutrates anytime soon.
The FTSEurofirst 300 index closed up 3.5 percent at1,241.99 points.
Banking stocks that have been hammered in recent days alsoled the rebound in Europe, with UBS up 14.4 percent, CreditAgricole up 9.3 percent and Deutsche Bank up 6.3 percent.
The strong rebound was echoed elsewhere in Europe:Germany's DAX index rose 3.35 percent, UK's FTSE 100 index wasup 3.41 percent and France's CAC 40 gained 3.54 percent.
Most Asian stock markets closed higher, with MSCI's measureof Asian stocks outside Japan rising more than 1 percent. HongKong's main index climbed 1.4 percent and Japan's Nikkei 225closed up 1.5 percent.
Oil prices rebounded sharply to over $109 a barrel afterFed rate cut, reversing heavy losses Monday that had beentriggered by financial woes at investment banks, including BearStearns. That reflected weakness in the overall economy of theworld's largest energy consumer.
U.S. crude rose $3.74, or 3.54 percent, to settle at$109.42 a barrel after sliding more than 4 percent on Monday inthe biggest one-day percentage drop in more than seven months.London Brent gained $3.81 to $105.56.
U.S. gold futures finished slightly higher on the back ofinflation fears due to a bounce of crude oil prices.
The active gold contract for April delivery in New Yorksettled up $1.70 at $1,004.30 an ounce, a session high.
(Editing by Leslie Adler)
